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Chapter One: The Basics of Record Keeping
IRS Child Care Provider Audit Technique Guide on Income
The revised IRS Child Care Provider Audit Technique Guide recommends that auditors
ask providers a lot of questions about their income. This is a reflection of how important the
IRS considers the reporting of income in family child care. In other words, the IRS will be
initially suspicious that a provider has not properly reported all her income on her tax return
and will ask many probing questions in an attempt to uncover unreported taxable income.
The IRS Child Care Provider Audit Technique Guide recommends that auditors look
carefully for the many different rate terms that may be listed in a provider’s contract or poli-
cies, such as charges for illnesses, vacations, late pickups, overnight care, transportation, dia-
pers, and so on. The auditor will look to see if you got paid any additional amounts beyond
your regular child care rate. Because parent fees are your main source of income, you should
take steps to keep careful records that back up the income reported on your tax return.
Here are some suggestions for how to do this:
Report all income from parents, the Food Program, subsidy programs, and grants on your •
tax return.
Keep records showing the source of all deposits to your checking and savings accounts, •
both business and personal. Indicate on deposit slips (see image below), check registers,
a software program, or other record-keeping system where the money for each deposit
came from (for example, from your husband’s paycheck, a business deposit, or a transfer
from your savings account). The IRS might look at your bank deposits and compare them
to what you reported as income. If you cannot identify where all the money came from
for each deposit, the IRS will assume any unidentified deposits are business income.
Make a note on a ledger or calendar if you receive cash from parents but do not deposit •
all of it into a bank account. Make sure to indicate how much of these cash payments you
did deposit.
Keep attendance records that show when a child is not present (due to sickness, a vaca-•
tion, or a holiday, for example) and whether a child is enrolled part-time for all or part
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